Analysis: Ukraine, Pull Back, Correction or a Continued Bullish Market?

Over
the last four weeks I have seen some really poor decisions. Now, I know some of you are going to say
“Hey, nobody can predict the market”!
That comment is so true on so many different levels. In real life trading we use technical,
fundamental, and sentimental analysis.
Sometimes it is important to use historical analysis which is nothing
more than learning from past market history.
If you are a trader, investor, or a professional in the market you
should be doing ALL of these types of analysis!
No one type is more important than the other and all need to be used to
make educated decisions in today’s market.
It is my belief that 2008 ruined generations of investors and makes it
harder to trade in the market today because of fear. Remember, 85% of all stocks follow the market
using the herd mentality. I would like
to go over some of the market decisions I’ve seen by individuals and
professionals all across the market. I want to try to relate their decisions to
these four types of analysis. I am going
to go over the order of importance based on technical analysis trumps fundamentals in the short term and sentiment
trumps all.

Technically
speaking the Dow Jones Industrial Average (DJIA) and the S&P 500 (SPX) have
had a 3% pullback and the Nasdaq (COMP) has had a 7% pullback in March. There have been some big heavy weight
companies that have had significant hits in the price of their stock. A standard RSI (14), the 5 and 20 day EMA’s,
and a standard MACD (12,26,9) chart gives you confirming bearish signals
technically speaking if you give them 2 to 4 days to prove themselves. In uncertainty, I believe it is really hard
to short term trade on only technical analysis because there is not enough time
to validate the analysis. Sometimes
there are so many different indicators to use that paralysis by over analysis
clouds your judgment. White noise makes
it very difficult to focus or trade the indicators and it needs other analysis
to understand why the technical information moves. Unfortunately, I have seen too many people
book losses as they move to a negative delta with options or sell out of stock
positions because they have the belief that the “big” correction was coming
last month. Oops!!!!

Sentimental
analysis is market sentiment which was definitely bearish the last two or three
weeks. Ukraine was going to be the end
of the markets in Europe. Russian and
the U.S. are going to go to a full blown war.
The market must have a 10% plus correction right now! If any of these comments sound familiar did
you ask them to prove it to you? I
couldn’t figure out how Ukraine mathematically had the potential to ruin any
market but their own. No war was ever
declared or threatened by any country. I
know that market sentiment is calling for a correction since we haven’t have
had one for the last 3 years. I love the
fact that we know the markets are being artificially propped up right now with
stimulus. Yet we can’t understand why we
haven’t had a pull pack? Sentimental analysis is trying to use put/call
ratios, VIX, and analysts’ to judge market or equity direction. It is not jumping on the headline news as the
worst case scenario for the market. It is
headline news because it is usually exaggerated to the point of selling TV
prime time, not because the predictions are going to come to pass.

Fundamental
analysis on the market people seem to forget.
I don’t know why? Fundamentally
our housing market and economy is being propped up with Fed stimulus at a
current rate of 55 billion per month. If
tapering occurs to zero a month then we will receive half of last year’s
stimulus or roughly half a trillion dollars.
Not a small amount of money and a great reason for the markets to remain
bullish. Fundamentally our markets are
much stronger than 2008. That doesn’t
mean they are perfect, fixed completely and where we want it to be. Companies are lean and mean. Obamacare is an uncertainty. Valuations are at an average below historical
levels and the market is not overvalued.
I see markets that still have room to run fundamentally and this is the
reason that trumps sentiment or technical analysis over a longer period of
time.

In
fact, the second pullback on the Ukraine threat we should have been a buying
opportunity with historical analysis.
What is historical analysis? Remembering what happened in the past and
using that knowledge to your advantage.
Ukraine was a 156 drop or so one day and the next day it was a 182 point
gain. The second time the market dropped
2 or 3 days before the market bounced back.
Ukraine never was a threat to our market and the second time thru should
have been a buying opportunity for you.
I am shocked at how short term people memory is and how soon to forget
losses to brag about a profitable trade.
I know people who are profitable every 4 out of 5 trades and are still
losing money in their portfolio. Learn
from you past trading history by using a trading journal, post it notes, or by
any means to gain from past experience.

I
trade with my wife’s risk tolerance. It
makes me trade the collar trade or with significantly less risk than I would take
myself. Use all four types of analysis
to your advantage! If you favor one over
the other, stop it. Make the best
educated decision you can by using all the tools that are to your
advantage. Make the best educated guess
you can with the best analysis to confirm your thought process. You will not be right all the time but by maybe
slowing down and by using analysis you can be more profitable.